Construction spending shows gains but outlook grim

WASHINGTON 
Construction spending fell less than expected in November as record activity on nonresidential projects helped offset another steep decline in housing. But the outlook remains bleak as credit is tight for builders trying to stay afloat amid a recession entering its second year.

Construction spending fell 0.6 percent in November, the Commerce Department reported Monday, less than half of the 1.3 percent decline economists had expected.

While housing took another sharp tumble, dropping 4.2 percent, this was partially offset by a surprisingly strong 0.7 percent rise in nonresidential activity.

But the pickup in nonresidential construction – which includes office buildings, shopping centers and hotels – was seen as a temporary blip. Analysts said cutbacks in commercial construction are inevitable with builders having a hard time getting financing amid the worst financial crisis since the 1930s.

"We feel that it is only a matter of time before commercial construction starts to decline," said Nigel Gault, chief U.S. economist at IHS Global Insight. "Once the projects already under way get completed, there is not much left in the pipeline."

Gault said he expects a steep decline on construction spending this year as the severe housing slump continues and nonresidential activity begins to fall because of the weak economy.

"The outlook for retail spending is very bad so we don't need more retail space at the moment and with employment falling sharply, we don't need more office construction," he said.

General Growth Properties Inc., the country's second-largest mall owner, last month hired a commercial real estate firm to put prominent retail centers in Boston, New York and Baltimore up for sale in a desperate attempt to shore up its finances. The Chicago-based company is saddled with huge amounts of debt it took on during the market's boom years when it aggressively bought assets.

Economists expect housing, which has been in a slump for two years, to continue to struggle in coming months as sales and home prices keep falling, hurt by the weak economy, tighter lending standards and rising mortgage foreclosures dumping more unsold homes on an already glutted market.

The 0.6 percent decline in total construction followed a 0.4 percent fall in October. The back-to-back declines left construction at a seasonally adjusted annual rate of $1.078 trillion, down 3.3 percent from a year ago.

The 4.2 percent drop in home construction was the biggest setback since a 6.2 percent plunge in July and left residential activity at a seasonally adjusted annual rate of $328.3 billion, down 23.4 percent from a year ago.

The nation's homebuilders have been reporting large financial losses as demand keeps falling. Hovnanian Enterprises Inc., based in Red Bank, N.J., said last month that its fiscal fourth-quarter loss totaled $450.5 million as revenue fell by 48 percent.

The 0.7 percent rise in nonresidential building left that sector at an all-time high of $428.2 billion at an annual rate, following a 0.4 percent drop in October. Strength in construction activity at power plants, factories and office buildings helped to offset weakness at shopping centers and amusement parks.

Underscoring the financing bind occurring because of the credit crunch, nearly 40 percent of real estate investors need to refinance part of their portfolios this year, according to investors surveyed in October by Marcus & Millichap Real Estate Investment Services and National Real Estate Investor magazine. These investors also expect prices to decline 15 percent on average this year.

The Commerce Department's construction report showed that spending on government projects kept rising in November, climbing 1.4 percent to a record annual rate of $321.95 billion. State and local construction rose by 1 percent to a record $295.2 billion rate, while federal construction was up 6 percent to an all-time high annual rate of $26.8 billion.

President-elect Barack Obama is pushing for a massive stimulus plan to keep the economy from falling into an even deeper recession. Part of that plan would involve increased spending for "shovel ready" infrastructure projects including roads and bridges. Some economists said they believed the jump in November may have partly reflected an anticipation that Congress will approve significant increases in infrastructure spending.

Bernard Baumohl, managing director of the Economic Outlook Group, said that local and state governments may be moving ahead with some projects "confident that the checks from Washington to pay for all of this activity will soon be in the mail."